The Jackson Hole Speech: Markets Approve

Stocks are moving higher so far today as Wall Street likes the prepared remarks given by Fed Chair Jay Powell at the annual Fed economic symposium in Jackson Hole.

He has left the door open for a rate cut in September and said, “The economic outlook may warrant a change in Fed policy”.

But be careful what you wish for. Rate cuts are associated with recession and even a depression, not a strong economy. It might be good news for markets, but bad news for the economy and consumers. We’ll closely monitor any further comments by Powell today to keep you informed.

Welcome to another session of Ask Me Anything.

For those who have recently joined our community, the financial analysis you receive might seem overwhelming at first. Don’t worry… we are here to help by breaking down complex issues in meaningful and simple ways.

That’s why every week, I will answer select questions that you send into our mailbag.

Since I can’t talk to you personally (although I love conversations with readers at our company events), these Ask Me Anything sessions will give you insight into our trading strategies and what’s top of mind for me and my team each week.

Even though I can't give personalized investment advice, you can submit general questions, and we will publish a few selected ones on a weekly basis.

The selected questions for this week are interesting because they show how geopolitics, technology and government policies can impact different sectors of the stock market in different ways. Review them carefully below.

The mailbag included questions on GPT-5 and AI valuations, the defense sector, and the future for the Chinese economy.

Here are a few:

Q: What does the new GPT-5 model of OpenAI say about the future of artificial intelligence and its sustainability? – Ron M.

A: The roll-out of the new GPT-5 model from OpenAI was a fiasco, although some users at least got a laugh out of how bad it was. The disappointment with its performance was understandable. Among the disappointments were that the answers were too short, the writing lacked personality, and the program’s insistence that there are three Bs in blueberry. It seems like Sam Altman is taking a step backwards in his quest for superintelligence. An even bigger problem in terms of the stock market valuations of AI champions is that markets are rewarding companies for spending hundreds of billions of dollars on AI data centers and development without regard to whether any profits are produced. Investors seem to take the future profits for granted. That may lead to a disappointment in earnings and the mother of all stock market corrections. If GPT-5 is any indication, that outcome may arrive sooner rather than later.

Q: Do geopolitical hotspots and continued threats of kinetic warfare make the defense sector an investment opportunity? – Kenneth R.

A: In short, U.S. military weapons systems are badly depleted, largely obsolete and not readily replaced even if it made sense to do so, which it does not in most cases. The solution is to start fresh with new advanced weapons designs, new technology and new factories. This rearmament process will take five-to-ten years to show initial results and twenty years to fully rebuild the U.S. military to the status of best in the world. In addition to well-established names like Lockheed Martin (LMT), RTX (RTX, formerly Raytheon), and Boeing (BA), investors should consider newer firms in the sector that have quickly established solid connections and key contracts. Since much of the technology needed is new or still in development, established firms do not have an edge and newer firms may even hold an advantage since they are not bound by legacy systems and processes. These firms include Kratos Defense and Securities Systems (KTOS) with a specialty in military electronics and robotics and Palantir Technologies (PLTR), which is a leader is massive data mining and artificial intelligence and a favorite of the U.S. intelligence community because of its ability in high-speed search and profiling. A defense and intelligence surge of the kind needed will take ten years to achieve scale and perhaps twenty-five years before the surge runs its course. It follows that the sooner investors make their moves, the greater the profits will be over time.

Q: What will Trump’s high tariffs on China do to the Chinese economy and markets? – Sarah S.

A: If one considers the three pillars of the Chinese economy to be domestic consumption, investment and trade, then two of those pillars (consumption and investment) are already failing. Thanks to Trump’s tariffs the third pillar (trade) may be about to collapse also. The impact of tariffs on China including an industrial slowdown and soaring youth unemployment are already apparent. Chinese exports benefitted from some efforts to bring forward demand to beat the tariffs in February and March. It will benefit further because Trump’s recent 90-day extension on tariff negotiations runs past October, which allows most of the Christmas goods deliveries to take place before tariffs are raised. Still, this relief is all temporary. The full impact of U.S. tariff increases will hit China dramatically from November forward. China is weakening with or without U.S. pressure. Trump may apply the final push in the form of steep tariffs later this year. Still, China’s path is clear including loan defaults, corporate bankruptcies and a maxi-devaluation of the yuan. This is all happening in real time. Investors beware.

We’ll have more featured questions answered from the mailbag next week. One may even be yours or a question that has been on your mind, so stay tuned.